Latest / Modularity Podcast / Stop Confusing Owner Pay With Real Profit

Transcript

Stop Confusing Owner Pay With Real Profit · Modularity Podcast

• 0:00
  You think you're making a hundred and fifty grand a year, but the reality is,
• 0:02
  you might actually be losing money.
• 0:04
  If you walked away tomorrow, your business would collapse, or worse,
• 0:08
  you'd have to pay someone else more than the business even makes just to keep the
• 0:12
  lights on.
• 0:14
  We see this all the time with service businesses doing, say,
• 0:18
  five hundred thousand in revenue, and the owner is looking at a hundred and fifty
• 0:22
  thousand left over in the bank account, thinking they are absolutely crushing it.
• 0:26
  Wait, a hundred and fifty grand on five hundred thousand in revenue?
• 0:30
  That's a thirty percent margin.
• 0:32
  To most people, that looks like a incredibly healthy business.
• 0:35
  What's the catch there?
• 0:37
  The catch is what we call the- the- the profit illusion.
• 0:40
  It's the difference between SDE-Seller's Discretionary Earnings-and true EBITDA,
• 0:46
  or operating profit.
• 0:48
  SDE is basically everything the business spits out to one owner-operator.
• 0:53
  It's your salary, your perks, your- your distributions, all lumped together.
• 0:57
  But EBITDA, real business profit, has to account for what it actually costs to
• 1:03
  replace you.
• 1:04
  If you are working sixty hours a week running the day-to-day operations,
• 1:08
  doing the sales, managing the team, you aren't just an owner receiving profit.
• 1:13
  You are an employee.
• 1:16
  And you are probably underpaying yourself.
• 1:19
  Right, so you're subsidizing the business with cheap labor.
• 1:22
  Your own.
• 1:23
  If you had to step out because, I don't know, you want to actually retire,
• 1:27
  or you get sick, you have to hire a general manager.
• 1:29
  What does a good manager cost?
• 1:31
  A hundred grand?
• 1:32
  A hundred and fifteen thousand plus benefits?
• 1:35
  Exactly.
• 1:35
  At least a hundred and fifteen thousand.
• 1:38
  So if you subtract that hundred and fifteen thousand replacement cost from that
• 1:42
  hundred and fifty thousand of leftover cash, your actual, true operating profit is
• 1:48
  thirty-five thousand dollars.
• 1:49
  On five hundred grand in revenue, that's not a thirty percent margin anymore.
• 1:55
  That is a razor-thin seven percent margin.
• 1:58
  One bad month, one client leaving, and you are deep in the red.
• 2:04
  That is a massive wake-up call.
• 2:06
  Because when you're in the day-to-day, you don't think about that replacement cost.
• 2:10
  You just see the cash in the bank.
• 2:12
  But basically, you've just bought yourself a highly stressful,
• 2:16
  sixty-hour-a-week job that pays a slightly above-average salary,
• 2:21
  rather than actually building a valuable, scalable business asset.
• 2:26
  Yes!
• 2:27
  You've built a job, not a business.
• 2:29
  And because you are subsidizing that job with your own free time,
• 2:34
  your pricing is probably way too low.
• 2:38
  You can't scale because you can't afford to hire anyone to take over your tasks at
• 2:43
  the prices you are currently charging customers.
• 2:46
  Okay, so how do we break out of this trap?
• 2:48
  If someone is listening to this right now and realizing, oh crap,
• 2:52
  my thirty percent margin is actually seven percent, how do they fix the math?
• 2:57
  The very first step is to perform a- a thorough audit of your actual hours.
• 3:03
  For one week, write down everything you do.
• 3:07
  Are you spending ten hours on bookkeeping?
• 3:09
  Fifteen hours on account management?
• 3:12
  Twenty hours on actual service delivery?
• 3:15
  Write it all down.
• 3:16
  Then, assign a realistic, market-rate replacement wage to each of those roles.
• 3:22
  Don't use a discount.
• 3:24
  Use what you would actually have to pay a qualified professional on the open market
• 3:29
  to do that exact job.
• 3:31
  So if a bookkeeper costs thirty-five dollars an hour, and an account manager costs
• 3:36
  seventy-five thousand a year, you calculate those fractional costs based on the
• 3:40
  hours you actually spent doing them.
• 3:43
  Precisely.
• 3:44
  Multiply the hours by those market rates, add them up, and that gives you your total
• 3:49
  replacement cost.
• 3:50
  Now, you take your current net profit and you subtract that number.
• 3:54
  This is what we call running a shadow P&L-a shadow profit and loss statement.
• 3:59
  It shows you the cold, hard truth of what your business actually makes when it's not
• 4:03
  relying on your exploited labor.
• 4:06
  And once you see that real, probably depressing number, that's your trigger to
• 4:11
  re-price your services.
• 4:12
  Your prices have to be high enough to absorb that replacement cost and still leave a
• 4:18
  healthy ten to fifteen percent true EBITDA margin on top.
• 4:22
  Otherwise, you're just running a charity for your clients at the expense of your own
• 4:28
  retirement.
• 4:29
  Right on.
• 4:29
  If you can't afford to pay someone else to do the work and still make a profit,
• 4:33
  your business model is broken.
• 4:36
  So, here are three highly practical, quick wins you can implement this week to start
• 4:41
  fixing this.
• 4:42
  First, do that hourly audit.
• 4:44
  Track your time for the next five business days.
• 4:48
  Every single hour.
• 4:50
  No cheating.
• 4:51
  Second, build that shadow P&L.
• 4:54
  Take your last three months of financials, subtract your calculated replacement
• 4:58
  cost, and find your true operating margin.
• 5:02
  And third, open a separate Owner's Pay bank account.
• 5:06
  This week.
• 5:07
  Transfer a fixed, market-rate wage for your labor into that account every single pay
• 5:13
  period, and leave the actual business profits in the main operating account.
• 5:18
  Stop treating your business bank account like a personal piggy bank.
• 5:22
  Do those three things, and you'll finally see the real financial health of your
• 5:26
  company.
• 5:27
  If you need help untangling your business math, setting up your strategy,
• 5:31
  or building the systems to actually scale past this bottleneck,
• 5:35
  go to modularity.us We help businesses design technology, websites,
• 5:41
  marketing, and growth strategies that actually work.
• 5:44
  See ya next time.
• 5:46
  Talk soon.